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Who's well calibrated
- People who receive quick and frequent corrective feedback
- e.g. poker players, weather forecasters,
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Planning Fallacy
Overconfidence cause
- Tendency to underestimate the resources/cost/time needed to carry out a task.
- Overconfidence in your ability to get things done, don't reach the intended outcome
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Mental Simulation Heuristic
(in planning fallacy)
- imagine steps need to complete a task, estimate time for each task then sum it up
- ignore set backs
- we may skip steps
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Judgement Heurstics and Bias
- 1. Anchoring and Adjustments
- 2. Representativeness
- 3. Availability
- 4. Overconfidence Bias
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Multi-Attribute Utility Theory
Riskless Choice
- normative model
- When faced with a riskless choice, A vs. B, we could compare the options along all the possible attributes and pick the option that is best overall.
Reality: Elimination by Aspects
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Elimination by Aspects
- 1. one characteristic/"aspect" of items in the choice set selected with a probability proportional to its importance
- 2. Only option that score optimally on that aspects are retained
- 3. If there is more than one option remaining, return to 1. If only one option remains, select it.
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Expected Utility Theory
Risky World
Compare the EU of all the options and pick the option with the highest EU
Reality: Prospect Theory
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Prospect Theory
- descriptive model
- Extension of EU
- Choice options/prospects are evaluated based on value and weights
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Prospect Theory
Value Function
- 1. Value is relative to a reference point (RP defines what is gain and what is a loss)
- 2. Losses loom larger than gains (function is steeper for losses than for gains)
- 3. People are generally risk-averse for gains but risk seeking for losses. (concave for gains and convex for losses)
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Prospect Theory
Weight Function
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Reference Point
- shifts
- losses and gains valued differently
- keep in mind comparison can make your gain look like a loss (ie comparing stocks mine did well but yours did better)
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Hedonic Editing
changing the way you view gain or lose in order to maximise your PT value
- minimise negative experience of losses by coding them as costs or relative gains (aim low so get excited lol)
- separate each gain, bundle each loss, bundle small losses with large gains
- manage expectations
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Loss Aversion
- losses hurt more then gains feel good
- want to void losses of the same gain magnitude
- Endowment EFfect (once it's mine it's mine)
- Status Quo Bias (why change the way things are)
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The Endowment Effect Explained
- loss aversion adds value to things we own
- varies based on sentimental value and comparability of goods (less they can be compared, higher EE)
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